An increasing number of investors are dipping their toes in the cryptocurrency markets. A recent survey found that one in five Americans have invested in, traded or used cryptocurrency. However, a major channel for U.S. investors – 401(k) accounts – has previously been virtually off-limits to cryptocurrency investments. A recent announcement by the country’s largest retirement plan provider suggests that is about to change, but not without strong pushback from the Department of Labor.
Responsibility of the 401(k) Fiduciary
Plan fiduciaries include employers who manage a retirement plan and investment advisers, among others, affiliated with the plan. Fiduciaries are subject to ERISA law, which is enforced by the Department of Labor. Fiduciaries have a responsibility to act solely in the interest of plan participants and their beneficiaries. They must carry out their duties with skill, prudence and diligence. They also have a duty to diversify plan investments.
This fiduciary duty applies to a fiduciary’s selection of investment alternatives in a 401(k) plan, even in a plan where participants choose their investments from a menu of offerings. The DOL has previously weighed in on how to apply fiduciary standards to certain types of investments – such as ESG and private equity – but generally defers to the facts and circumstances of the particular investment.
The DOL Weighs in on Fiduciary Responsibility as Applied to Cryptocurrency Investments
On March 10, 2022, the DOL issued Compliance Assistance Release No. 2022-01, addressing the issue of 401(k) plan investments in cryptocurrencies. The release stated that cryptocurrency investments present “significant risks of fraud, theft and loss,” based on price volatility, a lack of knowledge or expertise from interested investors, custody and recordkeeping concerns, valuation concerns, and an evolving regulatory environment. In light of these risks, the DOL urged plan fiduciaries to “exercise extreme care” when considering whether to add cryptocurrency as an investment option.
The DOL plans to conduct an investigative program targeting plans that offer cryptocurrency investments, including those that offer the investment through “brokerage windows” where plan participants buy and sell securities for their 401(k) on their own. During these investigations, fiduciaries will be asked to explain “how they can square their actions” with their fiduciary duties by allowing cryptocurrency investments.
Industry Responds to DOL Guidance
Multiple industry stakeholders have offered feedback on the guidance, including the U.S. Chamber of Commerce, Fidelity Investments, and a group of trade associations. The letters shared a few common criticisms. First, that the DOL should not specify which investments are or are not appropriate, but rather should stick to providing guidance on how fiduciaries can comply with their duties with respect to different types of investments. Second, that applying fiduciary duties to investments chosen through brokerage windows is inconsistent with current law, and that compliance would be difficult. Third, that the DOL should not issue such significant changes through best practice guidance, but should use notice and comment rulemaking that engages the industry.
Industry Forges Ahead
On April 26, Fidelity Investments announced the workplace Digital Assets Account, a new product offering that employers can choose to make available to participants in their 401(k) plans. The product will allow participants to invest up to 20% of their account balance and up to 20% of each payroll contribution in bitcoin. The Digital Assets Account will also hold short-term money market investments for liquidity purposes and will be custodied by a Fidelity-owned platform currently used for institutional investors. The product also features educational resources to help employees make educated decisions regarding any bitcoin investments.
Another 401(k) provider, ForUsAll, made investments in cryptocurrency available in June 2021 through a partnership with Coinbase Global. That product allows workers to invest up to 5% of their contribution in a range of cryptocurrencies.
On April 28, a DOL official commented on the Fidelity announcement to The Wall Street Journal, stating, “We have grave concerns with what Fidelity has done.” The official went on to state that the agency’s position is “focused on this stage of development” and that if an employer can make a case for including the asset that addresses the agency’s concerns, “that is their decision.”
As more Americans become comfortable with digital assets, some may be interested in the option of buying them through their 401(k) plans. The decision to allow the option must be made by the employer, however, and be guided by its fiduciary duty to participants with the understanding that it might have to justify its decision to the DOL.